Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 27, Problem 8CQ
To determine
Calculate the estimated real rate of interest.
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Suppose you purchase a $1,500 TIPS on January 1, 2020. The bond carries a fixed coupon rate of 5.5 percent. Over the first two years, semiannual inflation is 1.5 percent, 1.5 percent, 4 percent, and 3 percent, respectively. What is the principal at the end of month 6?
An investment had a nominal return of 10.6 percent last year. The inflation rate was 2.2 percent. What was the real return on the investment?
"The rate of return to bonds should be near equal to the equilibrium interest rate in the credit market."
True or False?
Chapter 27 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- You borrowed $200 and repaid $211 at the end of the year. During the year, inflation was 0.7%. What was the real interest rate, in percent? (Please use the Fisher effect to approximate your answer if appropriate.) Round to one decimal place digit and do not enter the % sign. If your answer is 6.14%, enter 6.1. If your answer is 6.16%, enter 6.2. If appropriate, remember to enter the-sign 4.8arrow_forwardThe purchasing power (real value of money) decreases if inflation is present in the economy. For example, the purchasing power of $33,000 after t years of 8% inflation is given by the model P=33,000e−0.08t dollars. How long will it take for the value of a $33,000 pension to have a purchasing power of $16,500 under 8% inflation?arrow_forwardSolve the following.Of the items listed in the table above, are there any items that cost more than one-and-one-half times as much in 2009 as they cost during the base years, but less than twice as much as they cost during the base period? If so, which ones? (Select all that apply.) food and beverages housing apparel transportation medical care recreation education and communication none of thesearrow_forward
- If inflation is currently 2.55% and a bank is lending money at 7.75% interest, what is the real interest rate the bank is earning on its loans?arrow_forwardWage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% above that in the second year, to account for expected inflation. If the inflation rate turns out to be 3% rather than 2%, who will be hurt? Why? If the inflation rate turns out to be 1% rather than 2%, who will be hurt? Why?arrow_forwardAssume that Sarah agrees to lend $100 to Sam for one year. Sam agrees to pay Sarah $117 at the end of the year. If inflation over that one year is 8%, what real rate of interest does Sarah earn on her $100?arrow_forward
- Suppose you take out a loan at your local bank. The bank expects to earn an annual real interest rate equal to 33%. Assuming that the annualized expected rate of inflation over the life of the loan is 11%, determine the nominal interest rate that the bank will charge you.arrow_forwardYou earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return? please write down the solution precisely ( especially after-tax rate of return)arrow_forwardHow much should they save annually for the next three years if they want to build up Joseph's college fund to $31,000, assuming a 5 percent rate of return and ignoring taxes on the interest?arrow_forward
- How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem.)arrow_forwardYou are earning 5.2% on a certificate of deposit. Inflation is running 3.5%. What is the real rate of return on your investment?arrow_forwardThe lower the interest rate: the greater the level of inflation the smaller the present value of a future amount the greater the present value of a future amount None of the statements associated with this question are correct.arrow_forward
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